Sheila Bair's 4 Types of Dysfunctional Regulators

Sheila Bair, former FDIC chair and current industry critic, thinks that regulators are partly to blame not only for the financial crisis and the banking industry's continuing lousy reputation, but she also has plenty of criticism for bankers and politicians.

There's still plenty of blame to go around when assessing the causes – and continuing after-effects – of the financial crisis, according to Sheila Bair, the former FDIC chair who keynoted this week's SAP Financial Services Forum in New York. And although Bair's harshest criticisms were targeted at banks and lenders that double-talked the regulatory agencies and put their own profits ahead of the financial safety of the public, she did not spare the regulators either.

Bair, who has been in the news recently talking up her new book "Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself," argued that regulatory timidity and inertia has contributed to regulatory complexity and confusion. "The pace of Dodd-Frank implementation has been too slow," she said. "The regulators have left themselves open to litigation, they have not moved as aggressively as they should have. When the rules have come out they have been too complex. The rules lack clarity, and the public doesn't understand what is the real benefit."

Bair then outlined four categories or "groups of mindsets" into which she thinks too many regulators fall. She described the first as "rubber band regulatory, folks who were way too lax during the crisis, [thinking] industry can self-correct. That proved not to be the case. Now these folks, who were laissez faire, now [argue], 'We have to watch everything.'" She pointed to the current approach to mortgage lending standards is an example of the rubber band mindset. After years of taking a hands-off approach, "now they are trying to anticipate every possible thing that could go wrong."

The second category identified by Bair is "genius regulators -- sometimes too smart for their own good. They tend to write complex rules that no one can understand." The third group is "unbelievers, the closet free market people. They still don't think regulation will work," Bair said, adding, "They think the 2008 crisis was a 100-year flood." She made it clear she doesn't think there is any place for this philosophy in the regulatory world, declaring, "If you don't believe in regulation, you shouldn't work for a regulator!"

Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio